Stock Market Rises on China’s Stimulus Package, but Economists Stay Wary

Key Takeaways

• The People’s Bank of China (PBoC) implemented the strongest stimulus measures since the Covid-19 pandemic.
• Despite concerns about the stimulus’s effectiveness, China’s stock market experienced its biggest rally in over two years.
• The 2024 economic growth target of 5% appears more achievable due to recent data and policy measures.

China’s economic woes have prompted its central bank, the People’s Bank of China (PBoC), to unleash its most aggressive stimulus package  since the COVID-19 pandemic. This unprecedented move aims to revive a struggling economy and achieve the government’s ambitious growth target of 5% for 2024.

While the stock market reacted positively with a two-year high, some economists remain skeptical. Concerns linger about weak loan demand and the effectiveness of the measures in reviving consumer spending amidst a property downturn.

Strongest Stimulus Since Covid-19

China‘s central bank, the People’s Bank of China, introduced several stimulus measures to boost the country’s struggling economy. The PBoC cut its key short-term seven-day reverse repo rate from 1.7% to 1.5% and reduced the reserve requirement ratio for banks, freeing up an estimated 1 trillion yuan ($142 billion) for lending, with the possibility of more cuts later this year.

The Chinese government also plans to fund the stock market and encourage share buybacks while providing additional aid to the property sector, a crucial driver of China’s economic growth.

Despite these efforts, some economists doubt  the measures will help achieve the government’s 5% growth target for the year. Concerns about weak loan demand from households may limit the impact, with economists suggesting that increased direct government spending might be necessary.

Analysts, such as those at Goldman Sachs , see the simultaneous rate and reserve ratio cuts as an indication of growing concerns about China’s economic challenges.

Stocks Reaction

China’s stock market witnessed its most robust rally in over two years on Tuesday after the government unveiled a significant stimulus package to revive the slowing economy. Industrial commodity prices also rebounded in response to the measures.

Equity investors responded positively to China’s stimulus measures, driving the CSI 300 index  up by 4.3%, its best performance since March 2022. Hong Kong’s Hang Seng index  also saw a 4.1% rise, while trading in the U.S. showed strong gains for Chinese companies.

After jumping in Hong Kong, Alibaba stock rose 7.9% to $97,19 in New York. JD.com did better, increasing by almost 14% to $33,90.

However, despite the recent rally, the CSI 300 index remains down 9% yearly. And nearly 40% below its early 2021 peak. This significant underperformance reflects investor concerns about China’s slowing economic growth, particularly amid the ongoing property market downturn and its impact on consumer spending.

Expectations On Chinese Economy

China’s economic outlook for 2024 has improved significantly since earlier this year. According to the World Economic Forum , the government’s target of 5% growth is now achievable, with recent economic data and policy measures supporting this projection.

Forecasts have been revised upward  by 0.4% for 2024 and 2025, reflecting the stronger-than-expected performance in the first quarter and the positive impact of government policies. Core inflation is expected to rise modestly, but output remains below potential.

While the outlook is generally positive, risks remain, including the ongoing adjustment in the property sector and potential fragmentation pressures. For economists  to achieve high-quality growth, China must implement comprehensive policy reforms.

These include strengthening the social safety net, liberalizing the services sector, and reducing distortions in manufacturing.

Trading Economics says  China’s GDP will reach $18.649 billion by the end of 2024. The economy is expected to grow in the long term, reaching $19.488 billion in 2025 and $20.424 billion in 2026.

About the Author

Giuseppe Ciccomascolo

Giuseppe Ciccomascolo began his career as an investigative journalist in Italy, where he contributed to both local and national newspapers, focusing on various financial sectors. Upon relocating to London, he worked as an analyst for Fitch's CapitalStructure and later as a Senior Reporter for Alliance News. In 2017, Giuseppe transitioned to covering cryptocurrency-related news, producing documentaries and articles on Bitcoin and other emerging digital currencies. He also played a pivotal role in establishing the academy for a cryptocurrency exchange website. Crypto remained his primary area of interest throughout his tenure as a writer for ThirdFloor.

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